Time in the Market
               Not Timing the Market

UNDERGROUND OIL: THE RISE OF THE BLACK MARKET FOR CRUDE

For those possessing the audacity and the resilience to engage in transactions with Moscow, Caracas, or Tehran, crude oil barrels, available at a discount, are within grasp. An intriguing market is thriving beneath the world’s watchful eyes: a ‘black market’ for oil. A closer look reveals that the unexpected surge in production hails predominantly from OPEC+ countries under the Western sanctions – notably Russia, Iran, and to a lesser degree, Venezuela.

Contrary to popular belief, the 25% plunge in oil prices since late 2022 is not a consequence of weakened demand amid slow economies. The root cause, ironically, is an oversupply. The excess influx of oil from Russia, Venezuela, and Iran prompts the question: Are Western sanctions failing to make the desired impact?

This scenario does not necessarily indicate the failure of sanctions but instead suggests that their primary objective is to ensure the oil market remains well-stocked, even if it allows Moscow, Tehran, and Caracas to continue oil sales. Western politicians often speak of using sanctions to incapacitate rogue petro-dictators, but their actual intent might be to curb inflation. Their strategy has paid off so far, but its effectiveness in the coming summer, when oil demand is projected to soar, is yet to be determined.

Amidst these peculiar circumstances, the International Energy Agency (IEA) has revised its 2023 global oil demand forecast upwards by nearly 400,000 barrels per day, pushing the average daily consumption to a record 102 million barrels. This optimistic outlook has persisted even as the Federal Reserve and the European Central Bank have hiked interest rates, and Wall Street forecasted a potential recession.

However, the IEA’s optimism has its detractors. Critics argue that the agency’s projection of a 2.2 million-barrel-per-day increase in oil consumption this year is overly ambitious, especially considering its prediction of a contraction in global diesel demand.

An inherent issue with the current oil market dynamics is the excessive emphasis on Washington’s political and economic fluctuations. Indeed, the US remains the world’s largest oil consumer, guzzling two out of every ten barrels produced globally. However, the American oil market is not synonymous with the global one. Its leading consumption share has been gradually declining over the years. In 2023, the combined consumption of China and India, expected to reach 21.4 million barrels a day, is predicted to surpass the U.S. consumption of 20.3 million barrels.

The true challenge for oil bulls and countries such as Saudi Arabia, which desire higher prices, lies in the supply-side dynamics and the cash necessities of sanctioned producers. Over the past six months, the IEA has boosted its 2023 output forecasts for Russia, Iran, and Venezuela by a cumulative 1.3 million barrels per day, pushing the annual average to 14.3 million barrels a day

The IEA has consistently underestimated Moscow since it invaded Ukraine over a year ago. The agency foretold a significant drop in Russian output in 2023 to an annual average of 8.71 million daily barrels. However, in April, Russia produced about 10.93 million barrels a day. Russian production would need to fall to meet the IEA’s revised forecast of an annual average of 10.73 million. Yet, Russia has not delivered on its promise to reduce production. Instead, it is pumping at will, trying to compensate for the lower prices through increased volume.

The rise of this oil black market provides a fascinating insight into the complex realities of the global oil economy, where sanctions, supply, demand, and politics intertwine. It offers an eye-opening perspective on the geopolitical dynamics shaping the market and their implications on countries caught in the crossfire of sanctions.

The traditional view of supply and demand isn’t the sole driving force in the oil market. Instead, the market has become a complex arena where geopolitical maneuvering, economic sanctions, and black market trading coalesce to dictate the trends.

A crucial takeaway from this situation is that the need for cash among sanctioned producers like Russia, Iran, and Venezuela drives them to find alternative ways to sell their oil, flooding the market with additional supply. This abundance of oil has significantly contributed to the recent drop in prices, a trend that could persist if these conditions remain unchanged.

Moreover, the IEA’s repeated miscalculations on Russia’s oil output indicate a potential disconnect between the agency’s forecasts and the realities on the ground. It suggests a need for a more dynamic and nuanced approach to forecasting that considers the complex political and economic realities influencing oil production.

As the world grapples with these intricate dynamics, the role of countries like China and India is becoming increasingly critical. As their combined oil consumption overtakes the U.S., their influence on the global oil market is poised to grow significantly. Their energy policies and consumption patterns could reshape the market in ways we are only beginning to understand.

So the emergence of a thriving black market for oil is a stark reminder of the complexities of the global oil economy. It is a testament to the adaptability of countries under sanctions and the lengths they will go to maintain their economic lifelines. As we look to the future, we must recognize that the traditional paradigms of understanding the oil market may no longer suffice. A more comprehensive approach that considers the geopolitical, economic, and market realities is required to navigate the ever-evolving landscape of the global oil industry.

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